Even if you have a job that pays well, you may occasionally struggle to pay your monthly bills. If you are like many of your neighbors, though, you may simply be unable to pay for an unexpected illness, injury or another emergency. After all, fewer than 40% of Americans have even an extra $1,000 on hand.
While it may fluctuate over time, your debt-to-income ratio may give you a good idea of your overall financial health.
What is your debt-to-income ratio?
Your debt-to-income ratio is simply how your total monthly debt compares to your gross monthly income. While this ratio may inform your decision of whether to seek debt relief, it may also be important in securing financing for a home, vehicle, education or many other things.
How do you calculate your debt-to-income ratio?
To calculate your debt-to-income ratio, you must first add together your monthly financial obligations. Then, divide your total monthly debt by your gross monthly income. This figure, which probably appears on your regular paystubs, is the money you make before deductions. To convert the quotient to a percentage, multiply by 100.
Why should you lower your debt-to-income ratio?
While decreasing your debt-to-income ratio may help you obtain financing, it may also improve your quality of life. That is, if your debt-to-income ratio is too high, you may not have enough money to pay your monthly bills. This may lead to anxiety, depression and other mental health issues.
To improve your debt-to-income ratio, you can either make more money or decrease your monthly debt. While it is not right for everyone, bankruptcy may help you discharge some of your outstanding debts and lower your debt-to-income ratio.